MICHELLE MEYER: The 4 Hot Housing Topics You Need To Watch

Bloomberg TV via YouTube Some experts are willing to argue that the housing market has begun a slow, long recovery. Home prices have been increasing, inventory has declined, and demand is picking up. All of this in turn is creating room for more construction.

But housing isn't expected to be strong enough to support the economy, writes Bank of America economist Michelle Meyer.

"National home prices have bottomed, but we expect prices to retest these lows early next year," according to Meyer. "We look for prices to essentially move sideways through next year."

Nonetheless, housing plays an important role in the economy. And in her latest research note to clients, Meyer points out 4 "hot topics" in housing in the past month. These issues will continue to play an important part in the housing conversation.

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While the first half was good for housing, the second half is likely to be softer

Housing conditions were better than expected in the first half of the year with inventory falling and demand picking up creating room for new constructions and helping home prices. Existing home sales are expected to continue to outpace new home sales since distressed homes sell at a significant discount.

But foreclosures which had slowed in the first half of the year are expected to tick higher at the end of the year, increasing the share of distressed properties.

So, while home prices have increased in the past few months, they will begin to reverse in the fourth quarter, "retesting the cyclical low early next year," according to Meyer. In fact home prices aren't set to begin a true recovery till 2014.

Source: Bank of America Merrill Lynch

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We won't see a return to a normal housing market any time soon

Looking at new construction, and in the absence of a major change to the adult U.S. population, there should be between 1.1 - 1.2 million new homes created every year. A typical demolition rate is about 300K - 400K, which implies normal housing starts of around 1.5 million.

But the reality is, because of all the construction we experienced during the housing bubble, construction will be much below the normal rate.

"Normal single family home sales should be about 600K, and starts around 900K as defined by the equilibrium homeownership rate. But in the near-term both sales and starts should overshoot," according to Meyer.

Source: Bank of America Merrill Lynch

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Eventually, Americans could start opting for buying over renting

BofA Merrill Lynch Global Research

In the long-run, home prices are determined by income growth. For now, however, prices are not in keeping with income because people are turning to rentals.

For most of the past decade, home prices were high relative to rent. But the opposite holds true now.

The rise in rents relative to home prices could encourage buyers to enter the market, but this will likely be limited by tight credit conditions and uncertainty surrounding home prices and the economic outlook.

Source: Bank of America Merrill Lynch

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The Federal Reserve will do whatever it can to help housing

Business Insider

Fed officials have so far expressed concern about the strength and sustainability of the housing recovery especially given the connection between home prices, credit conditions, and household wealth.